Have you ever heard the old trading expression, Buy the rumor, sell the fact? We are seeing some of that today in the cannabis sector. The market has given back nearly the entire 3.57% jump we saw after Canada legalized cannabis last Tuesday night. Before Canada passed the Cannabis Act on Tuesday, the Horizons Marijuana Life Sciences Index ETF (HMMJ) climbed nearly 10.5% from June 14th through the 21st, one week before everyone anticipated that Canada would be legalizing adult-use cannabis nationally.
If that is not an example of buy the rumor, sell the fact, I do not know what is. However, a selloff in the cannabis sector just does not make much sense considering in the last couple of weeks investors have received more news supporting the merits of a long-term uptrend in the cannabis sector than they may have ever seen. Any damage done by Attorney General Jeff Sessions’s rollback of the Cole Memo earlier this year should have been cleaned up by the introduction of the STATES Act, President Trump’s support of the new bill and the fact that our northern neighbor has gained a major financial edge over the United States in an entirely new industry gives the U.S. all the more reason to follow suit. New industries just do not come along that often.
Since cannabis was legalized in Canada, the major players in the cannabis sector are working to get a lot of cash on hand for further expansion. Canopy Growth Corporation (NYSE: CGC) is offering convertible notes worth $400 million Canadian dollars. Aphria Inc. (TSE: APH) is selling enough stock to raise $225 million Canadian dollars. In total it is estimated that Canadian cannabis companies have either offered or have agreements in place to raise a total of $880 million Canadian dollars which is the equivalent of $671 million U.S. dollars.
The one concerning factor investors should continue to be wary of is the cannabis sector’s close correlation to the rest of the market. Independently, all signs point to a strong long-term uptrend in cannabis equities especially with the enthusiasm behind the industry. However, the correlation to the the S&P 500 suggests that if the stock market suffers another correction or worse, the cannabis sector is likely to follow. The same reason why the cannabis sector dropped off hard at the beginning of the year is why it would happen again if the overall market begins to suffer. Investors will shy away from anything they see as risky and despite the enthusiasm and foundation being built for cannabis companies, investors will still see marijuana stocks as highly risky.
Among some of the other big movers last week taking advantage of all of the promising news for cannabis companies was GW Pharmaceuticals (Nasdaq: GWPH) up 2.4%. But, the stock is down hard today, about 5% after the FDA approved Epidiolex, the very first cannabis derived drug here in the United States to receive approval. One of the most remarkable qualities of cannabidiol, a cannabinoid found in cannabis plants, is its ability to reduce seizures in people suffering from epilepsy which is what the drug is designed for. Again, investors saw the approval from the FDA coming and so this is once again an example of buy the rumor, sell the fact. Risk management should be the focus of any investor because despite the strongest supporting fundamental information, people just do not know what will happen next in the market.
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